Pawnshops for the wealthy

Marc Kaye had to do something drastic when his children's tuition bills at Columbia and Harvard came due just as his consulting business hit a dry spell.

So he pawned his Picasso.

An art collector, Mr. Kaye brought a sketch by Pablo Picasso with the title Three Nude Women Near a Window, to a firm called Borro, a pawnbroker whose sophisticated digs 18 floors above Third Avenue resemble a bank or law office with Andy Warhol drawings of John Lennon and Freddie Mercury hanging on the walls. A mere 12 hours after Borro appraised the sketch, recently valued at $65,500, money hit Mr. Kaye's bank account and he paid the tuition bills. A few months later, his business recovered and he bought back the Picasso.

"I was in just a little pinch, and this was an elegant and discreet way to get cash," Mr. Kaye recalled.

Borro is one of several pawnshops sprouting around Manhattan that cater to the wealthy. Earlier this year, a London-based pawnbroker called Suttons & Robertson opened a shop here, and last year New York Loan Co. opened an office in the diamond district. New York Loan is owned by a Beverly Hills outfit that calls itself Pawnshop to the Stars.

The growth in high-end pawnshops is part of a boom underway in a business that historically has catered to folks forced to part with possessions for rent money. There are 493 pawnshops in the city, according to the Department of Consumer Affairs, and since 2010 the number of pawnbrokers or secondhand dealers has grown by 50%, according to the New York Police Department. (Pawnbrokers make loans against merchandise; dealers just buy and resell stuff.) The action is attracting Wall Street, with Borro earlier this month landing a $112 million credit line from private-equity firm Victory Park Capital, whose executive board chairman is former Connecticut Sen. Joe Lieberman.

Eyeing iPhones

The explosion of business is starting to alarm authorities. Last month, the Consumer Financial Protection Authority's director said the federal agency would consider regulating pawnbrokers. And to deter iPhone thefts, late last year Mayor Michael Bloomberg signed a law forcing pawnbrokers to share sales data electronically with law enforcement. Pawnbrokers plan to sue to block the law from taking effect in late April.

While pawnbrokers may not enjoy the highest reputation, their business has grown exponentially since the financial crisis. One of the largest pawnbrokers, Nasdaq-listed Cash America International, has seen revenue double since 2007, to $1.8 billion, amid a 90% jump in pawn loans. Borro expects its loan volume to double this year to $100 million.

To be sure, hard times force low- and middle-income consumers to hock rings or necklaces in exchange for a $100 jolt of cash. But much of the growth is in loans to wealthier people pressed for cash yet possessing valuable property, such as a collection of Harry Houdini memorabilia or a jacket that belonged to the rap-music star Notorious B.I.G.

Some 60% of Borro's clients are small-business owners who are referred from accountants or financial advisers.

"We help fill in the gap when a borrower doesn't have the assets that a bank wants to see on a loan application," said Borro's U.S. general manager, Tom McDermott, noting that clients are often people with assets that are hard to value and can't readily be converted into cash.

Buck Ennis

New York Loan's Mr. Blumkin lent $20,000 against a ring.

Paying for privacy

People pay a steep price borrowing from the likes of Borro. The firm charges annual interest rates of up to 48%, the most allowed by the New York City Department of Consumer Affairs, which regulates pawnbrokers. The average rate paid by small-business borrowers for short-term bank loans is just 5.6%, according to the National Federation of Independent Business.

That said, small-business lending at banks has declined by 14% since the financial crisis, according to Federal Deposit Insurance Corp. data, forcing entrepreneurs to seek out alternative sources of cash.

Also, pawn loans can be issued in minutes. And they don't involve cumbersome, perhaps embarrassing, personal credit checks, as the loan amount is based on whatever the pawnbroker says the asset is worth. Brokers are known to value property at less than market price.

Patrick Lieberman, who turns around failing Cold Stone Creamery outlets, said he needed $20,000 immediately around last Thanksgiving so he could buy ice cream equipment that had been foreclosed on before the opportunity melted away. Without time to wait for a bank loan, he decided to pawn a diamond ring his wife had inherited. He got the money from New York Loan Co. at 4% a month, bought the equipment, then repaid the loan three months later.

"I originally went to the diamond district thinking I'd sell the ring," Mr. Lieberman said. "But with the pawnbroker we consummated the transaction on the spot."

Mr. Kaye was so pleased after hocking his Picasso that he has recommended Borro to friends. One, he said, took out a pawn loan to pay his son's bail.

Crain’s New York Business is the trusted voice of the New York business community—connecting businesses across the five boroughs by providing analysis and opinion on how to navigate New York’s complex business and political landscape.